Debunking The PHEV Mythology

John Petersen

This week has been fascinating
because of three articles that found their way to my computer. The
first was
a thematic piece in McKinsey Quarterly titled "Profiting
from the low-carbon economy" that included a carbon abatement cost
graph which showed full hybrid automobiles (HEVs) offered CO2
abatement savings of roughly $50 per ton while plug-in hybrid
automobiles (PHEVs) imposed CO2 abatement costs of
roughly $20 per ton, or slightly more than a nuclear power plant. The
second was GM's
widely
publicized announcement that the Volt
would get 230 miles per gallon. The third was a special report from
CNNMoney.com titled "Volt
vs. Prius: What's the better deal?"

After reading and thinking about these articles for a few days, I went
to work on an Excel spreadsheet to analyze the differences between HEV
and PHEV options and reduce them to a simple customer oriented
financial analysis. The summary results
I share in this article demonstrate once again that the glittering
promise of
PHEVs is nothing more than post-modern mythology that does not stand up
to even basic economic analysis. For readers that take issue with my
assumptions and want to test their own theories, a copy of my Excel
spreadsheet is available here. The server copy is write
protected but you can save it to your system using a different name and
check my work at your leisure.

Gas Price Assumptions

Since 1999, the average annual increase in the price of crude oil has
been roughly 17.5%. Based on the following graph that I've used in
other articles, I believe oil prices will stabilize around $80
per barrel later this year and continue to move upward within the price
channel until we hit the next inflection point.

The following table shows potential future gasoline prices over the
next 10 years based on three scenarios: a 17.5% annual rate of
increase like we've had for the last decade; a 25% annual rate of
increase and a 32.5% annual rate of
increase. Any way you look at it, the numbers are incredibly ugly. We
cry and complain that gas prices peaked at $4.50 last year. Can you
imagine the pain and economic dislocation arising from $12.50 gas
prices 10 years out?

Calendar

17.5% Annual

25.0% Annual

32.5% Annual

Year

Gas
Price Increase

Gas
Price Increase

Gas
Price Increase

2010

$2.94

$3.13

$3.31

2011

$3.45

$3.91

$4.39

2012

$4.06

$4.88

$5.82

2013

$4.77

$6.10

$7.71

2014

$5.60

$7.63

$10.21

2015

$6.58

$9.54

$13.53

2016

$7.73

$11.92

$17.92

2017

$9.08

$14.90

$23.75

2018

$10.67

$18.63

$31.47

2019

$12.54

$23.28

$41.70

Since the goal of this article is to debunk prevailing PHEV
mythology, I'll assume that oil price increases over the next decade
will mirror the 17.5% rate we experienced in the last decade.

Other Key Assumptions

In a recent Instablog titled "Lies,
Damned Lies and MPG Claims for the Volt" I criticized GM for
claiming 230 mpg for the Volt because any attempt to combine electric
vehicle "EV" range with internal combustion engine "ICE" range
is meaningless. I also speculated that the easiest way
to get to a 230 mpg figure for the Volt was to assume a 46 mile daily
commute, a 40 mile EV range, and 30 mpg fuel economy for ICE powered
driving. While I found the numbers arbitrary for a public fuel
efficiency announcement, they didn't strike me as inherently
unreasonable. So I've
decided to follow GM's lead and use the same basic assumptions for
this article:

Daily driving distance

46 miles

Annual driving days

250 days

Annual vacation trips

1,000 miles

Total annual mileage

12,500 miles

Basic ICE fuel economy

30 mpg

Baseline electricity cost

$0.115 kWh

Inflation rate for electricity

4.0%

Discount Rate for
present value calculations

7.5%

Minimum car ownership period

5 years

Maximum car ownership period

10 years

My Baseline Scenario

As a baseline scenario I started with
a $20,000 new car equipped with a standard ICE
that would get 30 mpg and use 417 gallons of gasoline per year. A consumer who bought
the car for cash, used 417 gallons of gas per year, and sold the car
after five years for 35% of his initial purchase price would have an
undiscounted total cost of ownership of $21,671 for the five year
period.
Stretching the ownership period out to 10 years and reducing the resale
value to 10% of the purchase price results in an undiscounted total
cost of ownership of $46,090. To keep things as simple as possible, I ignored maintenance and assumed all batteries would last for the entire service life.

The HEV Alternatives

I then used the same basic assumptions to calculate the
total cost of ownership over five and ten year periods for:

A $21,000 micro hybrid that would improve fuel economy by 8%;

A $23,000 mild hybrid that would improve fuel economy by 20%;

A $26,000 full hybrid that would improve fuel economy by 40%; and

A $32,500 PHEV (after tax credits) that would offer 40 miles of
EV range and 30 mpg fuel economy from its ICE.

The five and ten year total cost of ownership values are
summarized in the following table.

Purchase

5 Year

Resale

Undiscounted

Price

Fuel Cost

Value

Cost of
Ownership

Pure ICE

$20,000

$8,671

($7,000)

$21,671

Micro Hybrid

$21,000

$7,977

($7,350)

$21,627

Mild Hybrid

$23,000

$6,936

($8,050)

$21,886

Full Hybrid

$26,000

$5,202

($9,100)

$22,102

PHEV 40

$32,500

$2,598

($11,375)

$23,723

Purchase

10 Year

Resale

Undiscounted

Price

Fuel Cost

Value

Cost of
Ownership

Pure ICE

$20,000

$28,090

($2,000)

$46,090

Micro Hybrid

$21,000

$25,843

($2,100)

$44,743

Mild Hybrid

$23,000

$22,472

($2,300)

$43,172

Full Hybrid

$26,000

$16,854

($2,600)

$40,254

PHEV 40

$32,500

$6,823

($3,250)

$36,073

This table is a very simplistic presentation that assumes a buyer will
pay cash for his vehicle and doesn't worry about details like the time
value of money. Nevertheless, it shows that a PHEV will represent a
9.5% up-charge for customers who buy with a 5 year ownership horizon
and a maximum savings of 21.7% if they buy with a 10 year ownership
horizon.

To take the level of sophistication up a notch, the following
table calculates the discounted present values of the five and ten year
total cost of
ownership using an imputed interest rate of 7.5% per year. While it's
easy to argue that a 7.5% discount rate is far too low for an
individual's financial transactions, the table makes it clear that a
PHEV will represent a 21.3% up-charge for customers who buy with a 5
year ownership horizon and a 3.4% savings for customers who buy with a 10 year
ownership horizon.

Purchase

5 Year

Resale

Net Present
Value

Price

Fuel Cost

Value

Cost of
Ownership

Pure ICE

$20,000

$6,855

($4,876)

$21,979

Micro Hybrid

$21,000

$6,307

($5,120)

$22,187

Mild Hybrid

$23,000

$5,484

($5,607)

$22,877

Full Hybrid

$26,000

$4,113

($6,339)

$23,774

PHEV 40

$32,500

$2,076

($7,923)

$26,652

Purchase

10 Year

Resale

Net Present
Value

Price

Fuel Cost

Value

Cost of
Ownership

Pure ICE

$20,000

$17,550

($970)

$36,579

Micro Hybrid

$21,000

$16,146

($1,019)

$36,127

Mild Hybrid

$23,000

$14,040

($1,116)

$35,924

Full Hybrid

$26,000

$10,530

($1,262)

$35,268

PHEV 40

$32,500

$4,421

($1,577)

$35,344

Sensitivity Factors

The most critical sensitivity factor for the total cost of ownership
calculations
is expected future gasoline prices. In general, ultra-rapid
escalation of gas prices makes PHEVs increasingly attractive on a net
present value basis, but only at the cost of imposing a crushing burden
on the global economy.The second major sensitivity factor is the imputed interest rate
used for the present value calculations. As the discount rate approaches credit
card rates of 15%, PHEVs become less attractive.

The third major sensitivity factor is battery cost. The
current Federal tax credit for electric drive vehicles is the rough equivalent of a $500
per kWh discount on
the purchase price of the batteries. For PHEVs to become truly
cost-competitve with micro, mild and full hybrid vehicles, the
industry will need to shave another 50% off current heavily
subsidized price levels. Unless the government decides that it wants to
subsidize PHEV battery costs in perpetuity, battery prices will eventually have to
fall from $1,000 per kWh to roughly $250 per kWh, which may indeed be
possible given another decade
of battery chemistry research and manufacturing technology development.
Unless and until we see massive reductions in battery costs,
however, PHEVs will be little more than vanity purchases for the green elite who
can pay big premiums for status symbols.

We've all heard the mythology that PHEVs will save users buckets of money by using cheap electricity instead of expensive gasoline. The hard reality is that none of
the HEV or PHEV options is a
money saver for the consumer. To make matters worse, all of the planned
PHEVs will be considerably less convenient and reliable than their less glamorous cousins. While I grew
up with the family car and have a difficult time imagining life without
one,
it may be time for the industrialized world to consider a paradigm
shift of the type proposed by Seeking Alpha contributor Bill James in his
recent article "Personal
Rapid Transit: Preempting the Need for Oil in Urban Transport."

The
days of using any kind of energy to move 3,000 pounds of steel and 200
or 300
pounds of passengers at highway speed are over! We've just been
avoiding that particular reality because it's unpleasant.

In a world where 6 billion people are working overtime to earn a small
piece of the lifestyle 500 million of us take for granted, the idea
that we can continue to waste any natural resources, including water,
food, oil and battery materials, must be crushed. Personal rapid
transit may not have all the comfort and convenience we've come to expect from a
car,
but it beats the heck out of forcing huge segments of America's
working population to rely on electric bicycles and scooters.

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works
as a partner in the law firm of Fefer
Petersen & Cie and represents North American, European and
Asian clients, principally in the energy and alternative energy
sectors. His international practice is limited to corporate securities
and small company finance, where he focuses on guiding small
growth-oriented companies through the corporate finance process,
beginning with seed stage private placements, continuing through growth
stage private financing and concluding with a reverse merger or public
offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School
and a 1976 graduate of Arizona State University. He was admitted to the
Texas Bar Association in 1980 and licensed to practice as a CPA in 1981.

3) employing much higher annual mileage (Personally, I believe use of moderate, "avg." miles driven can be very misleading. My family had decades of vehicle use ranging from 20K to 40K per vehicle per year, excluding rentals. Now, some of us are averaging just 5K miles per year.)

I'm a strong advocate of PRT BUT cars will still exist for many decades. A couple of problems in the analysis of plug=in hybrids. An assumption of only 30 mpg while using gas- why not the same mileage as a regular hybrid - seems reasonlable?Also the carbon emitted depends on the electric spurce. If coal big problem, if solar electric much different. Why give the least positive figure when it can vary?

Chuck, Iyqwyd and Mike, many thanks for the kind words. It really seemed to be appropriate to include the spreadsheet so that people could work with their own assumptions about how things could be different and what the impact would be. It's not perfect, but I hope it's interesting.

Fred, I have no idea how long it will take to perfect and implement something like PRT, but it's that kind of outside the box thinking that will lead us into the future. I started the analysis with an ICE because everything else is an improvement on that basic technology and the only way I know to do a meaningful side by side comparison is start with a generally accepted standard that can be generically described and then start adding bells, whistles and costs. The only thing that gave carbon figures was the McKinsey report (which I highly recommend if you're willing to spring for a subscription), but even they point out that on the sliding scale of carbon abatement costs PHEVs are a little more expensive than new nuclear plants and a little less expensive than PV solar in terms of capital outlay per ton of abatement.

Wow, your reasoning has so many glaring faults it's hard to know where to start.

MISTAKE #1: You can't make a dollar for dollar cost analysis with cars, because cars are not commodities. If they were, we'd all be driving Hundai Accents (currently the cheapest car in the US). There would be no Corvettes, Hummers, Lamborghinis, or Toyota Priuses--or anything else but the cheapest, most efficient car made. I think many of your price assumptions are wrong, but even assuming they are not, if people perceive value in having an electric car, feeling free from from gas stations and big corporation, feeling like they are contributing to a solution rather than the problem, they will happily pay more for a vehicle. Polls have shown that is in fact the case.

Obviously, since only a small fraction of people will buy the cheapest car--the Hundai Accent--proves price is a MINOR part of decision-making process for most people. Other factors take precedence.

MISTAKE #2: I'd put the probablility of having a major battery breakthrough or major battery price reductions over the next 10 years at about, oh, 100%. Look at the cost of plasma TVs, memory chips, and all other tech devices (like batteries) that actually use very little raw materials. My god, how many articles did I read about how it would take 10-20 years for prices on Plasmas and memory to drop substantially. Plasmas have dropped 90% in price in the past 10 years. RAM Memory has dropped 99% in price in the same time.

I have a couple of engineering friends who design/build Lithium batteries. They see no reason there couldn't be a 90% price drop (or relative capacity increase/price drop) within 10 years. One of them thinks it could happen in 5 if production ramps up like RAM chip production did.

MISTAKES 3-?: How about factoring in the envirnomental damage, health care damage, etc caused by gasoline/gasoline transportation. These are legitimate costs, that although are difficult to guage, are most likely significant--short and long term.

I could go on and on, but my point is you need to consider a much wider view of total, real costs and consumer moitivations, otherwise your nice spreadsheet has no meaning.

1. Any analysis of the cost-benefit of a drive train feature has to start with a basic cost for a basic configuration and then modify that cost for the drive train options. Using a single price and then doing the add ons is the only way you can do an analysis. But the nice thing about the spreadsheet is if you don't like working with a $20,000 base car you can easily increase the costs by $5,000 or $10,000 or $20,000, or any other number that fits you.

2. After five years of working full time in the battery industry at an executive level I would put the odds of a major breakthrough at closer to 10%. All the wonderful things we've seen in other technologies come from breakthroughs in physics. Chemistry is not anywhere near as forgiving. If you take materials out of a battery you have fewer atoms and hence fewer electrons. There is no Moore's law.

3. This presentation is from the perspective of a car buyer and the only costs we can deal with are the costs the buyer pays. We can agree that there are other societal costs and we might even be able to agree about the magnitude of those costs, but for the guy in the showroom our agreement won't matter.

Rob, the quick and dirty answer is perhaps. The Inspector General's report I cited in my recent USPS article plans on V2G revenue of $2,300 per year for a fleet of 3,000 vehicles. Those vehicles will collectively be able to provide about 45 MW of regulation service. At some point, the availability of PHEV and EV batteries to provide V2G services will exceed reasonably expected demand and the price for services will plummet, So early adopters who can negotiated long-term contracts may have dependable V2G revenue. All others are taking a pretty big risk.

Mr Petersen,
This is a very interesting analysis. Have you considered updating this to include pure electric vehicles? Now that the Nissan LEAF is to be released this year, I am considering purchasing one. It would be a second car for our family, and I have a very short daily commute, so it looks worthy of investigating. I'm not a quant-guy like you, so my own analysis has been limited to a rough cost-of-operation calculation. I would greatly appreciate seeing your take on the question.

I'd also be curious to see how you might figure-in rising electricity prices. Afterall, the CEO of my local electric utility was quoted saying, “You know, no matter what happens in policy space, electric prices are going to go up in the future."

You need to remember that my goal here is to help readers with good investment decisions, rather than personal consumption decisions.

There is little in the world more contentious and subject to good faith disagreement than an analysis of end user economics. It gets even worse when you try to tell folks that their electricity prices will soar as a result of increased renewables, increased smart grid spending and likely carbon mitigation costs. My more recent analysis has focused on the highest and best use of available resources, because I think that's ultimately the factor that will control market direction.